When it comes to big dividend preferred stocks, there’s the good, the bad and the ugly. Before getting into all the details of the five big dividend preferred stocks we really like right now (the good), we first give an example of a big dividend preferred stock that we consider “bad” and one that we consider truly “ugly.”

Clint Eastwood in The Good, The Bad and The Ugly (1966)

The Bad: Wells Fargo Preferred Series JWe consider Wells Fargo Preferred Series J to be an example of a “bad’ preferred stock investment for a variety of reasons. For starters, it currently trades at $28.29 but it can be called in just over 1.5 years for only $25. That means if Wells Fargo calls it then you’d have an annualized capital loss of ~7.3%. And considering the current dividend yield is only 7.1%, that’s not a preferred stock we’re interested in owning. To add a little more perspective, Wells Fargo’s weighted average cost of capital is currently only around 4.95%, which means they could refinance the 8% series J preferred stock (using a combination of debt and equity) at a lower cost. Said differently, there is incentive to call the Series J preferred stock as soon as it becomes callable on 12/15/2017. If you’re going to invest in Wells Fargo, we much prefer the common stock. You can read our full write-up on Wells Fargo common stock here.

The Ugly: Public Storage Series RWe consider Public Storage Preferred Series R to be an example of an “ugly” preferred stock investment. Public Storage has a track record of calling preferred shares as soon as they become callable, and these shares are callable in about two months on 7/26/2016. The shares currently trade at $25.52 and there is one more scheduled dividend payment of about $0.40 per share between now and the earliest call date. This basically means if you purchase the shares now, they'll probably get called at $25 in two months, and you've essentially locked in a negative return. That’s ugly.

The Good: Five Big Dividend Preferred Stocks Worth Considering...

5. Bank of America Preferred Series EE (5.9% Yield)Bank of America issued some new 6% preferred shares last month (BAC-A), and if you’re going to invest in big bank preferred stock this is a decent way to do it. The shares currently trade only $0.42 above par giving them an attractive 5.9% dividend yield. For perspective, Wells Fargo (another big bank) also offers 6% preferred shares with a similar call date, but the Wells Fargo shares trade at a much bigger premium ($1.87) making the yield to call less attractive. Further, we believe Bank of America’s shares are less likely to get called because they have a higher weighted average cost of capital (5.82%) than Wells Fargo (4.95%). Considering interest rates are rising and Bank of America’s WACC is already almost as high as the 6% coupon on the preferreds, it seems less likely that the B of A shares will get called, meaning shareholders will likely continue to receive the big 5.9% dividend yield beyond the earliest call date in April of 2021. We don’t necessarily like Bank of America's common stock, but we do believe the series EE preferred stock is attractive. You can read our full Bank of America write-up here.

4. Teekay Offshore Partners Series A (10.1% Yield)We believe Teekay’s preferred units (TOO-A) are attractive because of their big 10.1% yield and significant price appreciation potential. The company’s recent earnings release demonstrates management is prudently steering cash flows to support the big distribution payments. If you are an income-focused investor, Teekay is worth a closer look. You can read our full Teekay write-up here.

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